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Bank of America: Anticipating the Dividend

Explaining today's outperformance

This shortened week got off to a good start, as the DowJones Industrial Average(DJINDICES:^DJI) and the broader S&P 500 Index(SNPINDEX:^GSPC) both achieved five-year highs, with gains of 0.5% and 0.4%. The S&P 500 is now less than 5% below the all-time (nominal) high of 1,565.15, achieved on Oct. 9, 2007. (If you're curious, the S&P 500 Total Return index has gained 7.2% over the same period.)

Follow-up: VolatilityThis morning, I offered an explanation to the conundrum of ultra-low stock market volatility: The market had already anticipated that Republicans would blink with regard to the U.S. debt ceiling, rather than forcing a standoff next month. The fact that the VIX(VOLATILITYINDICES:^VIX) was roughly flat today, despite the news that Republicans will seek to vote tomorrow on a bill to extend the debt ceiling until May, suggests this explanation is correct.

B of A: First among equalsBank of America(NYSE:BAC) was among the top performers in the Dow today, rising 1.9%. There was no obvious company-specific news to explain this, but as one looks through related news items, one headline from Reuters did catch my attention: "Wells Fargo(NYSE:WFC) increases its quarterly dividend by 14%." With the caveat that it is often a fool's errand to try to explain daily stock-price movements, I think this may be related to B of A's performance today. Why, then, did JPMorgan Chase and Citigroup -- and Wells Fargo itself -- not appreciate significantly on the news? The answer: expectations.

In 2009, all four major banks slashed their dividends. B of A and Citi essentially eliminated them, paying out a token amount, and they remain the two banks that haven't raised their dividends since then. (All four banks need to obtain the Federal Reserve's approval with regard to any return of capital to shareholders.) As such, the shares of both banks are most sensitive to changes in expectations regarding their dividend payout. The news that Wells Fargo received approval for a significant dividend increase -- and that it has sought permission to return yet more capital to shareholders -- suggests that the Fed may be amenable to a similar request from B of A.

So why didn't Citi shares trade up also? The likelihood that a request from B of A will be approved is higher, as its capital position is stronger. In fact, at the end of the fourth quarter, B of A's tier one common equity ratio under the new Basel III standards -- 9.25% -- was the highest among the top four banks.